USDA Tries Pricing and Trading Environmental Benefits

Bringing ecosystem services out of the political realm and into the market would be welcome news

The announcement that the United States Department of Agriculture (USDA) is creating a new Office of Ecosystem Services and Markets was largely overlooked in December amidst the recession and presidential transition.

The importance of the announcement was not lost, however, on editors at The Katoomba Group, whose Ecosystem Marketplace website is the largest clearinghouse of information on markets and payment schemes for ecosystem services. There, the creation of the Office of Ecosystem Services and Markets was welcomed as "part of a massive realignment of the management of natural resources."

USDA is already far too big and has not served taxpayers well. The agency specializes in doling out entitlements, administering corporate welfare, increasing the cost of food for consumers, and generally ensuring that the nation's agricultural sector operates in a bubble untouched by the realities of the market. However, the new ecosystem and markets program offers a little bit of hope for an agency that is otherwise hostile to free markets.

Refining the concept of ecosystem services has been the topic of serious academic deliberation only in the last few years. The definition of ecosystem services depends on the context. The most widely known assessment of ecosystem services is the Millennium Ecosystem Assessment published by the United Nations in 2005. That report described declining stocks of natural assets as an impediment to reaching international development goals relating to basic human welfare in impoverished communities.

Among the ecosystem services identified in the report as diminished worldwide were fisheries, wild foods, genetic resources, and processes that naturally moderate or regulate air quality, local and regional climate, erosion, water purification, pests and natural hazards like flooding. Other ecosystem services were reported on an upward trend, including production of crops and livestock, and a net increase in climate-stabilizing carbon sequestration worldwide.

Agricultural lands are managed ecosystems that produce market commodities, like food and fiber, but also ecosystem services such as the mitigation of flood waters, recharge of groundwater aquifers, nutrient cycling, carbon sequestration, and, at a stretch, even the warm fuzzy feelings brought to mind for some at the idea of happy cows and family farmers. In economic parlance, these services are positive externalities of agricultural production. If the idea of positive environmental externalities is a more foreign concept than that of negative environmental externalities, there's good reason for that. There's little incentive to provide positive environmental externalities, so such goods and services are produced more or less accidentally, altruistically-or just not at all.

From subsidized irrigation water to price supports to special property tax credits, our agricultural policies reveal a general sentiment that farms and ranches provide social value beyond the sum of the commodities they produce. The 2008 Farm Bill, which directed USDA to undertake research into markets for ecosystem services, also provided hundreds of billions of dollars in farm subsidies that have an effect exactly opposite from markets for ecosystem services. The subsidies promote production of commodities out of proportion to actual market demand, frequently at the expense of environmental values. Ideally, the Office of Ecosystem Services and Markets will review these farm subsidies that have, at best, only a sloppy relationship to any social values, and scrap them in favor of programs that more accurately represent market demands.

The new ecosystem and markets program is far from being USDA's first trial in incentive payments to farmers for conservation. Conservation payments have been a popular method of subsidizing farms and improving on-farm environmental performance dating back to the 1930s. USDA will administer more than $4 billion in conservation funds this year, including $1.8 billion in rental payments through the Conservation Reserve Program.

The presumed role of the new office differs from these older conservation programs in that it will try to find private buyers for environmental services from agricultural lands, as opposed to using public funds as carrots to reduce environmental harms associated with farm operations. In comments to the press last week, outgoing Secretary of Agriculture Ed Schafer said, "…as important as publicly funded conservation efforts are, we also need to supplement them with strong private markets where environmental benefits can be priced and traded."

The first ecosystem service to be examined at the new office will be carbon sequestration. There is a relatively small domestic market for carbon sequestration in the form of retail carbon offsets-the international voluntary carbon offset market was worth an estimated $258 million in 2007. However, rural landowners don't need the help of the Office of Ecosystem Services and Markets to engage in that market. (In a recent report on the U.S. voluntary carbon offset market the Government Accountability Office concluded that increasing the role of the federal government in that market might "reduce flexibility, increase administrative costs, and stifle innovation.")

The bigger game is anticipated in carbon offsets to comply with government caps on greenhouse gas emissions, a niche for ecosystem service providers that is market-like only in the sense that offsets are volunteered for sale. Similarly, there are many active domestic compliance schemes trading pollutant permits driven by government water quality standards in regulated water bodies.

As yet, there has been somewhat less action in implementation of truly private markets for such ecosystem services domestically, though there are numerous examples in Costa Rica, Mexico, and elsewhere. A private market could help to clean up one of the nation's most concerning areas of environmental devastation, the dead zone that can stretch for more than 8,000 square miles from the mouth of the Mississippi River out into the Gulf of Mexico each summer. Surveys show that nitrogen and phosphorus runoff from corn and soybean production is primarily responsible for the problem. It's no coincidence that the two crops are among the most heavily-subsidized nationwide. The first-best solution would be to cut subsidies that encourage over-intensive production of these crops.

Another needed approach is to implement market schemes to facilitate payments by downstream water users-including other farmers, municipalities, and potentially the shrimping and fishing industries-to improve the way fertilizers and runoff are managed on agricultural lands upstream. In this case, ecosystem services markets will allow the biggest beneficiaries of cleaner water and healthier fisheries in the Mississippi River system to make the smart investments that are so badly needed.

A "massive realignment in the management of natural resources" to bring more ecosystem services out of the political realm and into the market would be welcome news. It is hard to imagine such change coming from within USDA, but that would certainly be a good place to start.